Posts from MBA Mondays

First we'll take care of some logistics and then we'll get to the post of the week in my Skillshare Class on sustainability in business.

Office hours will take place at 6pm eastern today. The link to the hangout is here. I don't like the way office hours worked last week and so I am changing them up. I will start by asking people to post questions in this discussions section. Then I will review a few business model canvas projects live for everyone to see. Then I'll finish up the 30 minute session by answering as many questions as possible while time lasts.

There are roughly 80 business model canvas projects posted so far. You can see them here. Since I will only be able to review a few of them today in office hours, it would be great for anyone who is taking this class to stop by and pick a few to give comments on.

If you are looking for a web-based tool to build and share your business model canvas, this thread mentions several of them.

OK. Now that we are done with the logistics, I will move on to my second post in this series.

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Last week we talked about long term thinking vs short term thinking. But sometimes, no matter how long term you are thinking, things happen that you didn't plan for and they can impact your business. Actually, this always happens. And that is when you need to adapt.

You will not stay in business forever if you don't adapt to changing market conditions. This doesn't mean adopting the "business model of the hour" model and this doesn't mean pivoting either. What I am talking about is the once every few years "oh shit moment" when you realize that the path you are on isn't going to work in a year or two and that you need to make some changes.

This is a frustrating realization. I have a good friend who has been running a business for more than a decade. He told me a few weeks ago that he thinks the market he has been operating in is changing and it is starting to impact his business. And just when he had everything firing on all cylinders.

That's how it is in business. Just as you are taking the victory lap for the kickass execution you and the team have delivered, the track takes a tilt and things start getting harder. Businesses don't operate in a vacuum. They operate in a dynamic ever changing market that is going to make things difficult for you, especially if you want to be in business forever.

I think some examples will help. The one that comes to mind front and center is Microsoft. By the middle of the 1990s, Microsoft had it all. They had a dominant share in desktop operating systems and a dominant share in desktop apps. They were literally printing money. Then the commerical internet happened. Netscape showed up. And Microsoft's market changed, forever.

Microsoft did adapt. They built Internet Explorer in reaction to Netscape and then used their desktop dominance to push it into the market, hurting Netscape so badly that it had to sell to AOL. That got Microsoft into trouble with the Justice Department and they were investigated as a result.

But what Microsoft didn't see in 1995 was Google because it didn't exist. And they didn't see the emergence of cloud based productivity apps because they didn't exist. In hindsight, it is pretty easy to see how fundamentally transformed Microsoft's business has been by the Internet and it is also pretty easy to see that they have not been able to adapt sufficiently to maintain any semblance of the dominance they had in the mid 90s. This stock chart tells you everything you need to know about what the Internet did to Microsoft. They may be surviving but they are certainly not thriving.

Another great example is RIM. I don't even need to tell this story. Everyone knows that the dismissive tone and stance that RIM's management took toward the iPhone and what it represented was essentially the death knell of a great company. I suspect they wish their stock chart looked like Microsoft's.

But let's look at a more positive example. As Ron Ashkenas points out in this HBR article, IBM saw that the hardware market was changing and their competitive position in it was changing with it. They sold their PC hardware business in 2005 to Lenovo and doubled down on consulting and related services. Their stock chart tells the rest of this story.

Adapting doesn't always mean exiting a business that you decide has issues. You can also retool, reshape, and refocus the business. A company that I've worked with for more than a decade saw the industry it services go through some painful transitions in the 2008/2009 downturn. They built an entirely new line of products that service the growth part of the industry while working to maintain the older products through an orderly and gradual decline. It's been a difficult transition because it has meant that the company's top line hasn't grown during this transition. But the company is still in business and the new products are growing quite nicely.

Every situation is different and I don't have some "silver bullet" to help you all think about how to figure out when to adapt and when to stay the course. But I do have some observations. The comfort of a strong balance sheet (and a nice looking stock chart) is often your enemy not your friend in these situations. The most agressive CEOs I've seen in these situations are often the ones with less than a year of cash in the bank and survival instinct in full on mode.

Another observation is that getting your organization to adapt is harder than you might think. Organizations have inertia. The bigger they are the more inertia they have. If you think you need to adapt your business quickly, you will need to figure who is in the boat with you and who is not and make the changes you need, particularly on your senior team, to align the team with mission and get going.

Finally, you cannot be in adaptation mode all the time. If you map out long living successful businesses, you will see they go through periods of great stability followed by periods of great change and then move back into stability mode. You have to know when to get into which mode and you need to see each one through to its logical conclusion.

Given how hard all of this is, you might wonder if you really want to stay in business forever. The answer may be no. But even if it is no, you had better plan for and act like you do. Because I am certain that if you don't, you won't.

Its time to kick off my Skillshare class on Sustainability. I will do a post each week this month (on Mondays of course). I will do office hours on Google Hangouts on Mondays at 6pm eastern for 30 minutes all month. We will do a project together which is to create a sustainable business model canvas. And there are groups you can create or join to allow you to collaborate with each other to complete the project and the class.

To join today's Office Hours on Google Hangouts, please check out the Skillshare page. There will be instructions there later today. [update: you can access the office hours hangout when its live here or afterwards via an archive here]

I will start with a post on Short Term Profit Maximization vs Long Term Business Health and then will end with some comments on our Business Model Canvas project.

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If you want to stay in business forever, you have to focus on the long term. You must construct a business model that builds confidence and trust with your customers and keeps them coming back day after day, year after year.

Many business schools teach executives and entrepreneurs that business is about profit maximization. I don't believe that. I believe business is about making a profit that sustains the business and enriches the owners but is not maximized in any period (month, quarter, year). I believe the goal of a business is sustainability so that all the stakeholders (customers, employees, owners, suppliers, etc) can rely on the business for the long term.

Let's use an example. You own a business that operates on the web. You are a leading supplier of ecommerce to a vertical market. You generate $50mm in annual revenues and make a profit of $5mm a year. You see the launch of the iPhone and Android and think that your customers are going to want to connect to your business via their mobile phones. You ask your VP Product to scope out what it would take to build a comprehensive set of mobile apps that will allow this. She tells you it will take an investment of $5mm over two years to complete this project. You gulp. That is going to reduce your profits by $2.5mm a year in each of the next two years. What do you do? You make the investment because you must invest in the long term success of the business even though that is not a profit maximizing event. It may simply get you back to the $5mm per year of profits you were making before. There may be no ROI on this investment in a positive sense. It may simply be a defensive investment. You still need to make it to ensure you will be around for the long run.

Clay Christensen talks about this kind of thing all the time. Big company executives are asked to calculate an return on investment (ROI) on the investments they want to make. If the ROI isn't greater than some minimum hurdle, the company doesn't make the investment. And so along comes a smaller competitor who makes the investment and they eat the big company's lunch.

ROI is not the right framework for companies to evaluate investments. ROI is for the wall street folks. They will use it to decide if they want to invest in your company. But when you make investment decisions in your company, don't use the tools that wall street uses. Use the tools that animals use. Survival instincts. What will it take to ensure that your company is around in ten years, fifty years, 100 years? That's how to think if you want to stay in business.

One of the most difficult decisions entrepreneurs and executives have to make is the decision to disrupt their own business. Let's say you are a cable operator. You are making billions of dollars of profits each year providing voice, video, and data services protected by a monopoly business model. Along comes the Internet and it allows voice and video to be delivered to your customers via any IP network (wireline, cable, wireless, etc). You know that over time, this is going to disrupt your business. What do you do? Do you invest in this new technology and drive it into the market, hastening the decline of your monopoly protected business model or do you do everything you can to slow down the advance of this technology?

Sadly most executives make the latter choice. Most entrepreneurs make the former choice. The latter choice is about short term profit maximation but can, and often does, lead to the demise of the business in the long term. The latter choice is about survivability even though it will almost surely lead to a less profitable business in the future. Tough choice. But to me its an easy choice if your goal is long term survival.

One of the reasons entrepreneurs make these hard choices when executives don't is entrepreneurs think like owners. They have that survival instinct in their gut. They don't want their baby to die. Executives are hired guns. They are focused on maximing the success of the business (and their compensation) over a short period that they will in the corner office. They have no incentive to think about what happens in 20 years or 50 years. They know they won't be around. And so the company isn't around either.

So when you construct your business model and create the culture of your business, emphasize sustainability over profit maximization in everything you create and do. This does not mean that you don't need to make a profit. Profits are the essence of survivability. You can't and won't survive without profits. They are everything when it comes to sustainability. But just because you need to make a profit doesn't mean you need to maximize it. Balancing the need for a profit with the need to sustain the business is the art of what you must do as the leader of a business. Do both and you win.

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Our project in this course is to create a sustainable business model canvas. If you are not familiar with the Business Model Canvas watch this video:

You will either have a business or you will invent a business and then you will map out your Business Model Canvas with the goal of sustainability as you go. You can do this by yourself or in teams. It doesn't matter at all. The goal is to do this project and learn by doing.

The thing I want you to focus on the most is the decisions you make as you fill out the canvas and which ones you were forced to compromise on some goal in order to maximize the sustainability of the business. Those are the magic decisions and the ones we want to document and discuss as we go through this course.

Good luck. Hopefully I will see you at 6pm eastern today in Google Hangouts.

My favorite course in business school was Financial Statement Analysis. It was like taking a course in investigative journalism or learning how to be a police detective. The professor explained that if you look hard enough, you can learn most anything you want about a business from the numbers. I've learned that numbers themselves are not the most important thing in a business but they sure are symptoms of what is going on inside the company. And therefore, they are worth studying if you care a lot about a company.

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This topic could be and is a full semester course at some business schools. It is a deep and rich topic that I can’t cover in one single blog post. But it is also a relatively narrow skill set at its most developed levels. If you are going to be a public equity analyst, you need to understand this stuff cold and this post will not get you there.

But if you are an entrepreneur being handed financial statements from your bookkeeper or accountant or controller, then you need to be able to understand them and I’d like this post to help you do that. I’d also like this post help those of you who want to be more confident buying, holding, and selling public stocks. So that’s the perspective I will bring to this topic.

In the past three weeks, we talked about the three main financial statements, the Income Statement, the Balance Sheet, and the Cash Flow Statement. This post is going to attempt to help you figure out how to analyze them, at least at a cursory level.

In general, I like to start with cash. It’s the first line item on the Balance Sheet (it could be the first several lines if you want to combine it with short term investments). Note how much cash you have or how much cash the company you are analyzing has. Remember that number. If someone asks you how much cash you have in your business, or a business you are analyzing, and you can’t answer that to the last accounting period (at least), then you failed. There is no middle ground. Cash is that important.

Then look at how much cash the business had in a prior period. Last month is a good place to start but don’t end there. Look at how much cash went up or down in the past month. Then look much farther back, at least a quarter, and ideally six months and/or a year. Calculate how much cash went up or down over the period and then divide by the number of months in the period. That’s the average cash flow (or cash burn) per month. Remember that number.

But that number can be misleading, particularly if you did any debt or equity financings during that period (or if you paid off any debt facilities during that period). Back out the debt and equity financings and do the same calculations of average cash flow per month. Hopefully the monthly number, the quarterly average, the six-month average, and the annual average are in the same ballpark. If they are not, something is changing in the business, either for the good or the bad and you need to dig deeper to find out what. We’ll get to that.

If cash flow is positive for all periods, then you are done with cash. If it is negative, do one more thing. Divide your cash balance by the average monthly burn rate and figure out how many months of cash you have left. If you are burning cash, you need to know this number by heart as well. It is the length of your runway. For all you entrepreneurs out there, the three cash related numbers you need to be on top of are current cash balance, cash burn rate, and months of runway.

I generally like to go to the income statement next. And I like to lay out a few periods next to each other, ideally chronologically from oldest on the left to the newest on the right. For startups and early stage companies, a 12 month trended monthly presentation of the income statement is ideal. For more mature companies, including public companies, the current quarter and the four previous quarters are best.

Some people like to graph the key line items in the income statement (revenue, gross margin, operating costs, operating income) over time.  That’s good if you are a visual person. I find looking at the hard numbers works better for me. Note how things are moving in the business. In a perfect world, revenues and gross margins are growing faster than operating costs, and operating income (or losses) are increasing (or decreasing) faster than both of them. That is a demonstration of the operating leverage in the business.

But some early stage companies either have no revenue or are investing in the business faster than they are growing revenue. That is a sound strategy if the investments they are making are solid ones and if they have a timeline laid out during which they’ll do this. You can’t do that forever. You’ll run out of cash and go out of business.

From this analysis, you may see why the business is burning cash or burning cash more quickly or less quickly. You may see why the business is growing its cash flow rapidly. I am most comfortable when the monthly operating income (or losses) of a business are roughly equal to its cash flow (or cash burn). This does not have to be the case for the business to be healthy but it means the business has a relatively simple economic architecture, which is always comforting. From Enron to Lehman Brothers, we’ve learned that complex business architectures are hard to analyze and easy to manipulate.

One thing that bears mentioning here are “one time items” on the Income Statement. They make your life harder. If you go back to the Income Statement post and look at Google’s statement, you’ll see that in the first year of their presentation Google made a one-time contribution to the Google Foundation. That depressed earnings in that period. You need to back that one time charge out for a consistent presentation, but you also need to be somewhat suspicious of one-time charges. Companies can try to bury ongoing expenses in one-time charges and inflate their earnings. You don’t see that much in startups but you do in public companies and it’s a “red flag” if a company does it too often.

If the monthly operating income (after backing out one-time charges) doesn’t come close to the monthly cash burn rates, then something is going on with the balance sheet of the business. Many of these differences are normal for certain businesses. My friend Ron Schreiber told me about a software distribution business he and his partner Jordan Levy ran in the mid 80s. They would buy software from Microsoft, Lotus, and others in bulk and sell it in small quantities to mom and pop businesses. Microsoft and Lotus wanted to be paid upfront when the shipped the software but the mom and pop businesses were running on fumes and could not pay until they sold the software. So Ron’s business, called Software Distribution Services (of course), was always out of cash. In Ron’s words, they were a bank and a distribution company and weren’t getting paid for the banking part of their business. All during this time the revenue line and the operating income line was growing fast and furious as desktop software went from a niche business to a mainstream business. Eventually Ron and Jordan had to sell their business to Ingram, a large book distributor who had the financial resources to provide the “banking services”. They made a nice hit on that company, but not anything like what Microsoft and Lotus did even though they grew their topline just as fast as their suppliers.

Ron and Jordan’s business was “working capital intensive.” Working capital is the non cash current assets and liabilities of the business. When they grow rapidly in relation to revenues, it means you are financing other parts of the food chain in your industry and that’s a great way to run out of cash.

So if monthly income and monthly cash flow aren’t in the same ballpark, look at the changes in working capital month over month. We went over this a bit last week in preparing the cash flow statement. If working capital is the culprit soaking up the cash, you need to look at two things.

The first is if the revenues are real. A great way to inflate revenues is to “ship product” to people who aren’t going to pay you. A company that is doing that is operating fraudently so you don’t see it very often. But if someone is doing this, cash will be going down while profits are steady and accounts receivable are growing rapidly. I always look for that in a company that is supposed to be profitable but is sucking cash.

The second is the availability of working capital financing. If a business can finance its working capital needs inexpensively, then it can operate successfully with this business model. In times when debt is flowing freely, these can be good businesses to operate. When cash is tight, they are not.

The final thing to look for on the balance sheet is capex.  If a business is operating profitably, and growing profits, but its capex line is growing faster than profits, it’s got the potential for problems. Hosting companies are an example of a set of companies that might be in this situation. Again, the availability of financing is the key. Local cable operators operated profitably for years with big negative cash flows because of capex. The financial markets like the monopolies these busineses were granted and consistently provided them with financing to buy more capex. But if that party ends, it can be painful.

This post is three pages long in my editor so it’s time to stop. There is more to discuss on this topic so I’d like to know if I did this topic justice for most of you or if you’d like another post that digs a little deeper. My preference is to move on because I’m getting a bit tired of writing about accounting every Monday, but most of all I want to cover the stuff you want to learn or freshen up on. So let me know.

Continuing this month’s practice of pulling an accounting related blog post from the archives, this week we feature the post on Cash Flow. The Income Statement and Balance Sheet get more attention, but there is nothing more important in keeping your business afloat than Cash Flow.

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This week on MBA Mondays we are going to talk about cash flow. A few weeks ago, in my post on Accounting, I said there were three major accounting statements. We’ve talked about the Income Statement and the Balance Sheet. The third is the Cash Flow Statement.

I’ve never been that interested in the Cash Flow Statement per se. The standard form of a cash flow statement is a bit hard to comprehend in my opinion and I don’t think it does a very good job of describing the various aspects of cash flow in a business.

That said, let’s start with the concept of cash flow and we’ll come back to the accounting treatment.

Cash flow is the amount of cash your business either produces or consumes in a given period, typically a month, quarter, or year. You might think that is the same as the profit of the business, but that is not correct for a bunch of reasons.

The profit of a business is the difference between revenues and expenses. If revenues are greater than expenses, your business is producing a profit. If expenses are greater than revenues, your business is producing a loss.

But there are many examples of profitable businesses that consume cash. And there are also examples of unprofitable businesses that produce cash, at least for a period of time.

Here’s why.

As I explained in the Income Statement post, revenues are recognized as they are earned, not necessarily when they are collected. And expenses are recognized as they are incurred, not necessarily when they are paid for. Also, some things you might think of as expenses of a business, like buying servers, are actually posted to the Balance Sheet as property of the business and then depreciated (ie expensed) over time.

So if you have a business with significant hardware requirements, like a hosting business for example, you might be generating a profit on paper but the cash outlays you are making to buy servers may mean your business is cash flow negative.

Another example in the opposite direction would be a software as a service business where your company gets paid a year in advance for your software subscription revenues. You collect the revenue upfront but recognize it over the course of the year. So in the month you collect the revenue from a big customer, you might be cash flow positive, but your Income Statement would show the business operating at a loss.

Cash flow is really easy to calculate. It’s the difference between your cash balance at the start of whatever period you are measuring and the end of that period. Let’s say you start the year with $1mm in cash and end the year with $2mm in cash. Your cash flow for the year is positive by $1mm. If you start the year with $1mm in cash and end the year with no cash, your cash flow for the year is negative by $1mm.

But as you might imagine the accounting version of the cash flow statement is not that simple. Instead of getting into the standard form, which as I said I don’t really like, let’s talk about a simpler form that gets you to mostly the same place.

Let’s say you want to do a cash flow statement for the past year. You start with your Net Income number from your Income Statement for the year. Let’s say that number is $1mm of positive net income.

Then you look at your Balance Sheet from the prior year and the current year. Look at the Current Assets (less cash) at the start of the year and the Current Assets (less cash) at the end of the year. If they have gone up, let’s say by $500,000, then you subtract that number from your Net Income. The reason you subtract the number is your business used some of your cash to increase its current assets. One typical reason for that is your Accounts Receivable went up because your customers are taking longer to pay you.

Then look at your Non-Current Assets at the start of the year and the end of the year. If they have gone up, let’s say by $500k, then you also subtract that number from your Net Income. The reason is your business used some of your cash to increase its Non-Current Assets, most likely Property, Plant, and Equipment (like servers).

At this point, halfway through this simplified cash flow statement, your business that had a Net Income of $1mm produced no cash because $500k of it went to current assets and $500k of it went to non-current assets.

Liabilities work the other way. If they go up, you add the number to Net Income. Let’s start with Current Liabilities such as Accounts Payable (money you owe your suppliers, etc). If that number goes up by $250k over the course of the year, you are effectively using your suppliers to finance your business. Another reason current liabilities could go up is Deferred Revenue went up. That would mean you are effectively using your customers to finance your business (like that software as a service example earlier on in this post).

Then look at Long Term Liabilities. Let’s say they went up by $500k because you borrowed $500k from the bank to purchase the servers that caused your Non-Current Assets to go up by $500k. So add that $500k to Net Income as well.

Now, the simplified cash flow statement is showing $750k of positive cash flow. But we have one more section of the Balance Sheet to deal with, Stockholders Equity. For Stockholders Equity, you need to back out the current year’s net income because we started with that. Once you do that, the main reason Stockholders Equity would go up would be an equity raise. Let’s say you raised $1mm of venture capital during the year and so Stockholder’s Equity went up by $1mm. You’d add that $1mm to Net Income as well.

So, that’s basically it. You start with $1mm of Net Income, subtract $500k of increased current assets, subtract $500k of increased non-current assets, add $250k of increased current liabilities, add $500k of increased long-term liabilities, and add $1mm of increased stockholders equity, and you get positive cash flow of $1.75mm.

Of course, you’ll want to check this against the cash balance at the start of the year and the end of the year to make sure that in fact cash did go up by $1.75mm. If it didn’t, then you have to go back and check your math.

So why would anyone want to do the cash flow statement the long way if you can simply compare cash at the start of the year and the end of the year? The answer is that doing a full-blown cash flow statement tells you a lot about where you are consuming or producing cash. And you can use that information to do something about it.

Let’s say that your cash flow is weak because your accounts receivable are way too high. You can hire a dedicated collections person. You can start cutting off customers who are paying you too late. Or you can do a combination of both. Bringing down accounts receivable is a great way to improve a business’ cash flow.

Let’s say you are spending a boatload on hardware to ramp up your web service’s capacity. And it is bringing your cash flow down. If you are profitable or have good financial backers, you can go to a bank and borrow against those servers. You can match non-current assets to long-term liabilities so that together they don’t impact the cash flow of your business.

Let’s say your current liabilities went down over the past year by $500k. That’s a $500k reduction in your cash flow. Maybe you are paying your bills much more quickly than you did when you started the business and had no cash. You might instruct your accounting team to slow down bill payment a bit and bring it back in line with prior practices. That could help produce better cash flow.

These are but a few examples of the kinds of things you can learn by doing a cash flow statement. It’s simply not enough to look at the Income Statement and the Balance Sheet. You need to understand the third piece of the puzzle to see the business in its entirety.

One last point and I am done with this week’s post. When you are doing projections for future years, I encourage management teams to project the income statement first, then the cash flow statement, and then end up with the balance sheet. You can make assumptions about how the line items in the Income Statement will cause the various Balance Sheet items to change (like Accounts Receivable should be equal to the past three months of revenue) and then lay all that out as a cash flow statement and then take the changes in the various items in the cash flow statement to build the Balance Sheet. I like to do that in monthly form. We’ll talk more about projections next week because I think this is a very important subject for startups and entrepreneurial management teams to wrap their heads around.

Continuing the visit back in time to the MBA Mondays Archives, today we are going to rerun the post on the Balance Sheet, which is a financial snapshot into the health of your business.

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Today on MBA Mondays we are going to talk about the Balance Sheet.

The Balance Sheet shows how much capital you have built up in your business.

If you go back to my post on Accounting, you will recall that there are two kinds of accounts in a company's chart of accounts; revenue and expense accounts and asset and liability accounts.

Last week we talked about the Profit and Loss statement which is a report of the revenue and expense accounts.

The Balance Sheet is a report of the asset and liability accounts. Assets are things you own in your business, like cash, capital equipment, and money that is owed to you for products and services you have delivered to customers. Liabilities are obligations of the business, like bills you have yet to pay, money you have borrowed from a bank or investors.

Here is Google's balance sheet as of 12/31/2009:

 

Let's start from the top and work our way down.

The top line, cash, is the single most important item on the balance sheet. Cash is the fuel of a business. If you run out of cash, you are in big trouble unless there is a "filling station" nearby that is willing to fund your business. Alan Shugart, founder of Seagate and a few other disk drive companies, famously said "cash is more important than your mother." That's how important cash is and you never want to get into a situation where you run out of it.

The second line, short term investments, is basically additional cash. Most startups won't have this line item on their balance sheet. But when you are Google and are sitting on $24bn of cash and short term investments, it makes sense to invest some of your cash in "short term instruments". Hopefully for Google and its shareholders, these investments are safe, liquid, and are at very minimal risk of loss.

The next line is "accounts receivable". Google calls it "net receivables' because they are netting out money some of their partners owe them. I don't really know why they are doing it that way. But for most companies, this line item is called Accounts Receivable and it is the total amount of money owed to the business for products and services that have been delivered but have not been collected. It's the money your customers owe your business. If this number gets really big relative to revenues (for example if it  represents more than three months of revenues) then you know something is wrong with the business. We'll talk more about that in an upcoming post about financial statement analysis.

I'm only going to cover the big line items in this balance sheet. So the next line item to look at is called Total Current Assets. That's the amount of assets that you can turn into cash fairly quickly. It is often considered a measure of the "liquidity of the business."

The next set of assets are "long term assets" that cannot be turned into cash easily. I'll mention three of them.  Long Term Investments are probably Google's minority investments in venture stage companies and other such things. The most important long term asset is "Property Plant and Equipment" which is the cost of your capital equipment. For the companies we typically invest in, this number is not large unless they rack their own servers. Google of course does just that and has spent $4.8bn to date (net of depreciation) on its "factory". Depreciation is the annual cost of writing down the value of your property plant and equipment. It appears as a line in the profit and loss statement. The final long term asset I'll mention is Goodwill. This is a hard one to explain. But I'll try. When you purchase a business, like YouTube, for more than it's "book value" you must record the difference as Goodwill.  Google has paid up for a bunch of businesses, like YouTube and Doubleclick, and it's Goodwill is a large number, currently $4.9bn. If you think that the value of any of the businesses you have acquired has gone down, you can write off some or all of that Goodwill. That will create a large one time expense on your profit and loss statement.

After cash, I believe the liability section of the balance sheet is the most important section. It shows the businesses' debts. And the other thing that can put you out of business aside from running out of cash is inability to pay your debts. That is called bankruptcy. Of course, running out of cash is one reason you may not be able to pay your debts. But many companies go bankrupt with huge amounts of cash on their books. So it is critical to understand a company's debts.

The main current liabilities are accounts payable and accrued expenses. Since we don't see any accrued expenses on Google's balance sheet I assume they are lumping the two together under accounts payable. They are closely related. Both represent expenses of the business that have yet to be paid. The difference is that accounts payable are for bills the company receives from other businesses. And accrued expenses are accounting entries a company makes in anticipation of being billed. A good example of an accounts payable is a legal bill you have not paid. A good example of an accrued expense is employee benefits that you have not yet been billed for that you accrue for each month.

If you compare Current Liabilities to Current Assets, you'll get a sense of how tight a company is operating. Google's current assets are $29bn and its current liabilities are $2.7bn. It's good to be Google, they are not sweating it. Many of our portfolio companies operate with these numbers close to equal. They are sweating it.

Non current liabilities are mostly long term debt of the business. The amount of debt is interesting for sure. If it is very large compared to the total assets of the business its a reason to be concerned. But its even more important to dig into the term of the long term debt and find out when it is coming due and other important factors. You won't find that on the balance sheet. You'll need to get the footnotes of the financial statements to do that. Again, we'll talk more about that in a future post on financial statement analysis.

The next section of the balance sheet is called Stockholders Equity. This includes two categories of "equity". The first is the amount that equity investors, from VCs to public shareholders, have invested in the business. The second is the amount of earnings that have been retained in the business over the years. I'm not entirely sure how Google breaks out the two on it's balance sheet so we'll just talk about the total for now. Google's total stockholders equity is $36bn. That is also called the "book value" of the business. 

The cool thing about a balance sheet is it has to balance out. Total Assets must equal Total Liabilities plus Stockholders Equity. In Google's case, total assets are $40.5bn. Total Liabilities are $4.5bn. If you subtract the liabilities from the assets, you get $36bn, which is the amount of stockholders equity.

We'll talk about cash flow statements next week and the fact that a balance sheet has to balance can be very helpful in analyzing and projecting out the cash flow of a business.

In summary, the Balance Sheet shows the value of all the capital that a business has built up over the years. The most important numbers in it are cash and liabilities. Always pay attention to those numbers. I almost never look at a profit and loss statement without also looking at a balance sheet. They really should be considered together as they are two sides of the same coin.

Continuing the visit back in time to the MBA Mondays Archives, today we are going to rerun the post on the Profit and Loss Statement, which I called "one of the most important things in business" in the original post.

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Picking up from the accounting post last week, there are two kinds of accounting entries; those that describe money coming into and out of your business, and money that is contained in your business. The P&L deals with the first category.

A profit and loss statement is a report of the changes in the income and expense accounts over a set period of time. The most common periods of time are months, quarters, and years, although you can produce a P&L report for any period.

Here is a profit and loss statement for the past four years for Google. I got it from their annual report (10k). I know it is too small on this page to read, but if you click on the image, it will load much larger in a new tab.

The top line of profit and loss statements is revenue (that's why you'll often hear revenue referred to as "the top line"). Revenue is the total amount of money you've earned coming into your business over a set period of time. It is NOT the total amount of cash coming into your business. Cash can come into your business for a variety of reasons, like financings, advance payments for services to be rendered in the future, payments of invoices sent months ago.

There is a very important, but highly technical, concept called revenue recognition. Revenue recognition determines how much revenue you will put on your accounting statements in a specific time period. For a startup company, revenue recognition is not normally difficult. If you sell something, your revenue is the price at which you sold the item and it is recognized in the period in which the item was sold. If you sell advertising, revenue is the price at which you sold the advertising and it is recognized in the period in which the advertising actually ran on your media property. If you provide a subscription service, your revenue in any period will be the amount of the subscription that was provided in that period.

This leads to another important concept called "accrual accounting." When many people start keeping books, they simply record cash received for services rendered as revenue. And they record the bills they pay as expenses. This is called "cash accounting" and is the way most of us keep our personal books and records. But a business is not supposed to keep books this way. It is supposed to use the concept of accrual accounting.

Let's say you hire a contract developer to build your iPhone app. And your deal with him is you'll pay him $30,000 to deliver it to you. And let's say it takes him three months to build it. At the end of the three months you pay him the $30,000. In cash accounting, in month three you would record an expense of $30,000. But in accrual accounting, each month you'd record an expense of $10,000 and because you aren't actually paying the developer the cash yet, you charge the $10,000 each month to a balance sheet account called Accrued Expenses. Then when you pay the bill, you don't touch the P&L, its simply a balance sheet entry that reduces Cash and reduces Accrued Expenses by $30,000.

The point of accrual accounting is to perfectly match the revenues and expenses to the time period in which they actually happen, not when the payments are made or received.

With that in mind, let's look at the second part of the P&L, the expense section. In the Google P&L above, expenses are broken out into several categories; cost of revenues, R&D, sales and marketing, and general and administration. You'll note that in 2005, there was also a contribution to the Google Foundation, but that only happened once, in 2005.

The presentation Google uses is quite common. One difference you will often see is the cost of revenues applied directly against the revenues and a calculation of a net amount of revenues minus cost of revenues, which is called gross margin. I prefer that gross margin be broken out as it is a really important number. Some businesses have very high costs of revenue and very low gross margins. And example would be a retailer, particularly a low price retailer. The gross margins of a discount retailer could be as low as 25%.

Google's gross margin in 2009 was roughly $14.9bn (revenue of $23.7bn minus cost of revenues of $8.8bn). The way gross margin is most often shown is as a percent of revenues so in 2009 Google's gross margin was 63% (14.9bn divided by 23.7). I prefer to invest in high gross margin businesses because they have a lot of money left after making a sale to pay for the other costs of the business, thereby providing resources to grow the business without needing more financing. It is also much easier to get a high gross margin business profitable.

The other reason to break out "cost of revenues" is that it will most likely increase with revenues whereas the other expenses may not. The non cost of revenues expenses are sometimes referred to as "overhead". They are the costs of operating the business even if you have no revenue. They are also sometimes referred to as the "fixed costs" of the business. But in a startup, they are hardly fixed. These expenses, in Google's categorization scheme, are R&D, sales and marketing, and general/admin. In layman's terms, they are the costs of making the product, the costs of selling the product, and the cost of running the business.

The most interesting line in the P&L to me is the next one, "Income From Operations" also known as "Operating Income." Income From Operations is equal to revenue minus expenses. If "Income From Operations" is a positive number, then your base business is profitable. If it is a negative number, you are losing money. This is a critical number because if you are making money, you can grow your business without needing help from anyone else. Your business is sustainable. If you are not making money, you will need to finance your business in some way to keep it going. Your business is unsustainable on its own.

The line items after "Income From Operations" are the additional expenses that aren't directly related to your core business. They include interest income (from your cash balances), interest expense (from any debt the business has), and taxes owed (federal, state, local, and possibly international). These expenses are important because they are real costs of the business. But I don't pay as much attention to them because interest income and expense can be changed by making changes to the balance sheet and taxes are generally only paid when a business is profitable. When you deduct the interest and taxes from Income From Operations, you get to the final number on the P&L, called Net Income.

I started this post off by saying that the P&L is "one of the most important things in business." I am serious about that. Every business needs to look at its P&L regularly and I am a big fan of sharing the P&L with the entire company. It is a simple snapshot of the health of a business.

I like to look at a "trended P&L" most of all. The Google P&L that I showed above is a "trended P&L" in that it shows the trends in revenues, expenses, and profits over five years. For startup companies, I prefer to look at a trended P&L of monthly statements, usually over a twelve month period. That presentation shows how revenues are increasing (hopefully) and how expenses are increasing (hopefully less than revenues). The trended monthly P&L is a great way to look at a business and see what is going on financially.

I'll end this post with a nod to everyone who commented last week that numbers don't tell you everything about a business. That is very true. A P&L can only tell you so much about a business. It won't tell you if the product is good and getting better. It won't tell you how the morale of the company is. It won't tell you if the management team is executing well. And it won't tell you if the company has the right long term strategy. Actually it will tell you all of that but after it is too late to do anything about it. So as important as the P&L is, it is only one data point you can use in analyzing a business. It's a good place to start. But you have to get beyond the numbers if you really want to know what is going on.

We have five weeks (including today) before we start the sustainability course. It's not enough time to start a new series. So I've decided to rerun five posts on accounting and financial statements that I did early on in MBA Mondays. This is core stuff. If you want to start a business, run a business, and/or operate a business, you need to know the basics of accounting and finance.

So today we will rerun the post on accounting. The next three weeks we will go through the three main financial statements. And we will end with a post on understanding financial statements.

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Accounting is keeping track of the money in a company. It's critical to keep good books and records for a business, no matter how small it is. I'm not going to lay out exactly how to do that, but I am going to discuss a few important principles.

The first important principal is every financial transaction of a company needs to be recorded. This process has been made much easier with the advent of accounting software. For most startups, Quickbooks will do in the beginning. As the company grows, the choice of accounting software will become more complicated, but by then you will have hired a financial team that can make those choices.

The recording of financial transactions is not an art. It is a science and a well understood science. It revolves around the twin concepts of a "chart of accounts" and "double entry accounting." Let's start with the chart of accounts.

The accounting books of a company start with a chart of accounts. There are two kinds of accounts; income/expense accounts and asset/liability accounts. The chart of accounts includes all of them. Income and expense accounts represent money coming into and out of a business. Asset and liability accounts represent money that is contained in the business or owed by the business.

Advertising revenue that you receive from Google Adsense would be an income account. The salary expense of a developer you hire would be an expense account. Your cash in your bank account would be an asset account. The money you owe on your company credit card would be called "accounts payable" and would be a liability.

When you initially set up your chart of accounts, the balance in each and every account is zero. As you start entering financial transactions in your accounting software, the balances of the accounts goes up or possibly down.

The concept of double entry accounting is important to understand. Each financial transaction has two sides to it and you need both of them to record the transaction. Let's go back to that Adsense revenue example. You receive a check in the mail from Google. You deposit the check at the bank. The accounting double entry is you record an increase in the cash asset account on the balance sheet and a corresponding equal increase in the advertising revenue account. When you pay the credit card bill, you would record a decrease in the cash asset account on the balance sheet and a decrease in the "accounts payable" account on the balance sheet.

These accounting entries can get very complicated with many accounts involved in a single recorded transaction, but no matter how complicated the entries get the two sides of the financial transaction always have to add up to the same amount. The entry must balance out. That is the science of accounting.

Since the objective of MBA Mondays is not to turn you all into accountants, I'll stop there, but I hope everyone understands what a chart of accounts and an accounting entry is now.

Once you have a chart of accounts and have recorded financial transactions in it, you can produce reports. These reports are simply the balances in various accounts or alternatively the changes in the balances over a period of time.

The next three posts are going to be about the three most common reports;

    •    the profit and loss statement which is a report of the changes in the income and expense accounts over a certain period of time (month and year being the most common)
    •    the balance sheet which is a report of the balances all all asset and liability accounts at a certain point in time
    •    the cash flow statement which is report of the changes in all of the accounts (income/expense and asset/liability) in order to determine how much cash the business is producing or consuming over a certain period of time (month and year being the most common)

If you have a company, you must have financial records for it. And they must be accurate and up to date. I do not recommend doing this yourself. I recommend hiring a part-time bookkeeper to maintain your financial records at the start. A good one will save you all sorts of headaches. As your company grows, eventually you will need a full time accounting person, then several, and at some point your finance organization could be quite large.

There is always a temptation to skimp on this part of the business. It's not a core part of most startup businesses and is often not valued by tech entrepreneurs. But please don't skimp on this. Do it right and well. And hire good people to do the accounting work for your company. It will pay huge dividends in the long run.

Dr. Dana Ardi is a friend, former colleague, and an expert in the fields of talent management, organizational design, assessment, leadership, coaching, and recruiting. Dana has taught me a ton about these areas and was a partner at Flatiron Partners where we made a big investment in the talent side of the business. I asked Dana to "bat cleanup" on this series on People and she's done that in fine form with snippets from her coming book on Betas, the new archetype of organizational leader.

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“When someone asks you, A penny for your thoughts, and you put your two cents in, what happens to the other penny?” It’s a really great question, as well as being one of my favorite among many George Carlin quotes. And it came to mind when Fred asked me to contribute a guest blog post.
 
Having just put the finishing touches on a book about organizations that’ll be out next year, I’m happy to toss that second penny into the ring.
 
I consider myself a corporate anthropologist. I’ve spent most of my life studying the cultures of organizations, how they evolve and intersect with what’s happening right this second, and how the people in them influence and shape their communities. My consulting mission isn’t to transform established, successful companies – they’re doing fantastically well the way they are. It’s to assist them and other entrepreneurial ventures with the positioning to succeed with today’s workers, in today’s new business environment, and to help them evolve.
 
In the Information Age, workers in today’s organizations are accustomed to being sold, not told. Robert Louis Stevenson once wrote, “Marriage is a long conversation,” but so today is business – which is why companies have to change or else risk going under.
 
It’s pretty clear to me that the Information Age requires a new approach to organizing groups of people, as well as to successfully function within those same organizations. This approach I call Beta, to distinguish it from the old Alpha paradigm, and it trickles down to corporate culture, recruitment, and most of all, leadership.
 
What do all the most successful leaders, companies and workers have in common? In a nugget, it’s the trait we call self-awareness. In Heart, Smarts, Guts and Luck, a recent business title published by Harvard Business Review Press, co-author Anthony Tjan argues that all successful business leaders are skilled at just that. Of the four core qualities that he has observed make up most successful entrepreneurs and business-building, they know when to dial up…or dial town. They know when to emphasize passion, lower the pitch on assertion and bypass analytical smarts in favor of creative thinking or relational skills. In short, they’re as fluid and adaptable as the businesses they run.
 
What if you want to be there, but you’re not there yet? Here are a few things to to bear in mind about today’s and tomorrow’s winning-est organizations.
 
The Most Successful workplaces of the Future…
 
    •    Do away with archaic command-and-control models. Winning workplaces are horizontal, not hierarchical.Everyone who works there feels they’re part of something, and moreover, that it’s the next big thing. They want to be on the cutting-edge of all the people, places and things that technology is going to propel next.
 
    •    Instead of knives-out competition, these workplaces put a premium on collaboration and teamwork, and on building a successful community with shared values.
 
    •    Oh, and I’m not saying workplaces should become democracies – that would never work – simply thatpeople are empowered and encouraged to express themselves.
 
    •    Winning contemporary workplaces stress innovation. They believe that employees need to be given an opportunity to make a difference – to give input into key decisions and to communicate their findings and learnings to one another.
 
Corporate Culture matters more than you think
 
    •    The best teams are hired with collaboration in mind. People who remain in the culture are those who are dedicated to the ideal that that the whole is more than the sum of the parts.  
 
    •    In the most winning corporate cultures, everyone has something to contribute. Leadership is fluid and bend-able. Integrity and character matter a lot. Everyone knows about the culture. Everyone feels the culture. Everyone subscribes to the culture. Everyone recognizes both its passion and its nuance.

    •    In winning corporate cultures, roles, identities and responsibilities mutate weekly, daily, sometimes even hourly. There’s a focus on social, global and environmental responsibility. No, these initiatives aren’t just good ideas, they really matter.
 
Today’s Most Successful Organizations…
 
    •    …look less like an advancing army and more like a symphony orchestra. They are divided up into sections rather than functions. Each section has a leader and every player is a member of a team that works in synchrony. The orchestra conductor may direct what the orchestra does, but he knows he’s not completely in charge. His sole mission: To impel the other orchestra members to play to the very best of their ability, while integrating those efforts into a concerted group effort.
 
    •    In life as in business, most people are not generals, they’re lieutenants. Nor do they necessarily want to be generals – they want to be impact players. Frankly, most of us are happy to have the opportunity to accomplish what we’re good at, and what we enjoy, so long as we receive adequate recognition and reward.
 
    •    The most successful contemporary cultures convey the message that it’s okay to be yourself, and to do your best. You don’t always have to move up; you can also move across. More important is that you are happy, fulfilled, contributing to the community and feeling productive and rewarded.
 
The Leaders of Today have to be self-aware –  and top-down mandates no longer work
 
    •    There will always be the need for decisive leadership, particularly in crisis times (and there’s a touch of the autocrat and control freak inside every successful entrepreneur). But today’s world is all about collaboration –and launching and maintaining that “long conversation” that Stevenson talked about.
 
    •    The leaders of tomorrow need to practice ego management. They should be aware of their own biases, and focus as much on the present as on the future. They need to manage the egos of employees by rewarding collaborative behavior and teamwork.
 
    •    Leaders should strive to become what Michael Maccoby dubbed “Productive Narcissists,” tempering high self-esteem and confidence with empathy and compassion. Mindfulness, of self and others, by boards,executives and employees, may very well be the single most important trait of a successful company. Companies have to define the culture; the culture can’t define them. So pre-define it!
 
    •    Finally, companies need to understand that every individual in the organization is a contributor; and the closer everyone in the organization comes to achieving his or her singular potential, the more successful the business will be. Successful cultures encourage their employees to keep refreshing their toolkits, keep flexible, keep their stakes in the stream.

Rethink Recruiting

    •    Diversity is key – and by diversity I mean of thought, style, approach and background. You’re building a team, not filling a position. Cherry-picking candidates from name-brand universities will do nothing to further an organization and may even work against it.
 
    •    Don't buy resume or credentials. Buy competence, track record, character and culture fit.
 
    •    Avoid hiring only superstars. It’s about company teams, not just the individual. Sure, it’s totally tempting to create an All-Star team, but in case you hadn’t noticed, those people don’t pass the ball, they just shoot it.
 
    •    Hire competencies but remember: hire with your heart. Make sure new workers fit into the preexisting culture, while also importing their expertise. Become their sponsor – onboarding is essential. Spend time listening. Give them what they need to succeed.
 
    •    Sometimes you need to hire aliens – folks outside of the culture who bring new ideas and best practices from other places. These people become culture-influencer and agents of change.
 
    •    New hires are more than just the college or university they attended. In short, don’t hire credentials, hire people.
 
    •    Character matters. Most people don’t succeed in teams not because they are unqualified or incompetent, but simply because they are not a good cultural fit.
 
    •    Act now. One of the big mistakes entrepreneurs make is they don’t act quickly enough. Put aside perfectionism, don’t wait for the perfect person – he or she may not exist. Hire track record and potential.
 
    •    If, looking back, you realize someone is not a good cultural fit, or is not getting it done, don’t wait to make the change. Sometimes it is just as simple as readjusting their position or redefining their role. If they really don’t get it done, then it’s time to make the tough call.

Be on the lookout for signs of a lack of emotional commitment from employees:
 
    •    People complain about the hours they’re putting in;
    •    Turnover is high, particularly among young top achievers;
    •    Recruitment is difficult; there’s little innovation or creative thinking; and
    •    There’s more politicking that there is actual dialogue.
 
Take note of those employees who have an emotional commitment to the organization:
 
    •    People give extra effort voluntarily;
    •    They become your best ambassadors
    •    Employees make personal and professional sacrifices to stay rather than leave;
    •    People feel free to think outside the box; and
    •    Meetings often result in lively debates and team action.

The employees of tomorrow plays to their strengths

    •    Rather than aspiring to omnipotence, and acting as though they’re the masters of all they survey, Betas focus on what I call “motivated skills,” e.g., the things they know they do exceptionally well. And instead of exploiting their peers’ weaknesses in order to attain and hold onto power, they encourage their fellow team-members to play to their own strengths so that the entire team and organization can succeed.

Self-Awareness is all (but don’t think for a moment it means you’re soft)

    •    What is self-awareness but bringing an intellectual and emotional understanding of your strengths and their weaknesses, your goals and their motivations to a given situation?
 
    •    Ensure that you hire self-aware people. Give them the proper tools, techniques and feedback, as well as the proper levers of success and sponsorship. Onboard people with the belief that they’ll be successful. Then make sure it happens.
 
    •    That said, organizations cannot be whole-heartedly responsible for their employees’ development; employees have to play their roles, too. Beta leaders are skilled at assembling employees, encouraging them to think new thoughts in different ways and challenging them to do new things.

 If there’s a single takeaway from years of consulting, recruiting and observing both old and new organizations it’s this: People really truly matter. They are your strategy. They need to be encouraged and coached to pursue what they do best; to keep doing what they enjoy, and to participate in the success of your company.
 
To survive and thrive today and into the future, business leaders need to grow and develop their own self-awareness. Self-awareness means that you are willing and able to collaborate with employees, directors, customers and yes, even your competitors. It means that you understand that every individual in your organization is a contributor with varying degrees of potential – and that the closer everyone comes to attaining a high level of self-awareness, the closer the organization comes to achieving its potential. It means that your self-awareness feeds into your employees’ own self-awareness, which in turn ignites the overall success of the venture.
 
Now that Fred has made me the cleanup hitter, I’ll leave with this parting shot: Hire smart and hire the very best people you can. Don’t just onboard someone to fill a slot. Instead, build a community. Keep asking yourself not just what you want and need, but what’s best for the organization to grow and evolve.  And remember what George Carlin said: “If you haven’t gotten where you’re going, you’re probably not there yet.”

 When I announced the MBA Mondays series on People and mentioned I would end with a number of guest posts, I got an email from my friend Scott Kurnit, founder of About.com and Keep Holdings. Scott said, "Culture that is something I have thought a ton about. I'd love to contribute a guest post."

So what follows are Scott's thoughts and experiences on building culture in an organization.

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Culture

Every company has a culture. The issue is – do you let it happen by accident or do you shape it?

– The CEO is the culture driver. It can’t be done by HR or anyone else. You either live it… or don’t bother.

– Many cultural imperatives are the same at every company. That doesn’t mean you shouldn’t write them down and socialize them, but come up with the 3 or 4 that make your company special, that make someone want to join your company… or not. Your people ARE your culture. The culture quickly takes on a life of its own.

– My favorite cultural imperatives are: Be Adaptive, Be Adoptive, Encourage Push Back, and Cherish Input, but NOT consensus. That said, these are ours – adopt what you like, but make your culture your own.

I think about company culture every day, but last week was especially poignant with About.com back in the news. We “pre-set” the About culture on day one and it’s one of the half dozen reasons the company is around 15 years later after six CEOs, four owners and almost no investment for the last decade.

As Fred noted in his May post kicking off the culture discussion, you can get away with an accidental culture for the first 20 or 30 hires – but then culture takes on a life of its own. I’d say that you’re better off doing what we did with About when from the outset Bill Day and I locked ourselves in a room and thought it through. What kind of people did we want to work with? What was going to make us strong all the way through to a thousand team members (yes, we banned the word employee). Were we going to trust our people or manage tightly? Were we willing to pay top dollar or save money and hire at the 50th percentile? Who was going to be most important – senior management, staff, Guides, advertisers or users – and in what order? What would our decision making process be? Would we come in early or stay late? Did we care if people were in the office or working remotely? Etc., etc.

Culture was extra important to the About model since our business needed to get big fast, but it also showed me that defining a culture sooner than later builds the best business foundation. It seems so obvious, but out of 150 start-up CEOs I’ve discussed this with I found only three who pre-determined their culture. That’s crazy!

It doesn’t matter what your culture is, but have one. The sooner everyone knows what makes the place tick, the sooner you’ll hire the right team members and then they’ll hire the right ones and then them and them and them.

While I list all 10 of the Keep Holdings culture imperatives below, I’ll pull out a few that are religion for me and likely the most controversial.

Be Adaptive: We’re working in an amazingly dynamic industry. Be prepared to change on a dime. If I hire you to do X but need you to do Y tomorrow, buck up and go with it… or don’t come in the first place. You sure get a different kind of person when they’re game to ride the waves. Don’t want to ride waves, go work at Big Slow Corp Inc. and good luck with that.

Be Adoptive: Hey, we work in the Internet – Invent like crazy, but don’t be afraid to adopt good ideas from everywhere. Don’t tread on someone’s patented business process, but if you like someone’s ideas, build on them. Yes, that’s legal – and it’s OK to admit you don’t have all the great ideas.

Pushback: Everyone should know why they’re doing something. I’ll never forget when I asked a colleague at Showtime for some quick data analysis. When I asked him the next day where it was and he told me he needed another day I realized *I* screwed up by not telling him I only wanted the info if he could do it in 10 minutes. Everyone should be encouraged to say, why, how long should I spend, what should I not do instead and are you sure it’s worth the effort? While this was about saving some time, this simple concept now makes our company more transparent and productive at every turn – whether for little tasks or big strategic issues.

Input, not consensus: This may be the biggest for me since it’s the major thing I can point to for why AOL crushed Prodigy in the pre-internet online world. I still have nightmares of 18 people sitting around a table trying to make a pricing decision. It took Prodigy over a year to adjust pricing to be more in line with – and trump AOL and it took Steve Case’s AOL one measly day to respond. One year… one day. I still get chills. Rather than have the indecision of 18 people, pick one to be the decider as the very first action. Trust me, that person feels the weight and authority when they own the decision. They’ll get a ton of input… rather than having endless discussions. Group decision-making makes people fearful of engaging with the concern that it will never end. When one person’s in charge… they want to hear it all. And fast. And get it right. And crisp. And done!

OK, here’s the whole list that drives Keep.com, TheSwizzle and AdKeeper. Feel free to Adopt as appropriate… but make sure you live it. These are not for everyone… but you should all have those that work for you.

Consumers always come first.
We operate as an “upside-down pyramid:” customers first, those who directly engage with customers second, management last.
We respect individual privacy and aim to give consumers greater control of their web experiences.
We embrace community, with users in control.

We maximize value to our partners.
We love brands, products and services!
We partner with brands to help them succeed on the web.
But user experience trumps money every time.

We operate with the highest integrity.
We are straight shooters and demand integrity in principle and practice.
We don’t tolerate politics.
We admit and confront our mistakes… and learn from them.

We are adaptive, flexible and nimble.
We race towards opportunity.  We spin on a dime.
We move at Internet speed – ahead of the crowd.
Jobs can change at any time.

We are adoptive, embracing good ideas from all sources.
We embrace diversity in perspective, viewpoint, thinking and actions.
All ideas are welcome and appreciated.

We encourage teamwork, risk-taking, creativity, and speed-to-market
Teamwork makes better products, but can slow things down.
So, we encourage single ownership, creativity, risk and speed.

We value input (& push-back), not consensus.
We value everyone’s opinions but recognize the power of crisp and quick decisions.
Decision-owners must solicit input, welcome push-back, and ultimately make the call and execute.

We are strategically focused.
Our work is market focused.
We build and evolve world-class products.
Our offerings will be powerful, relevant, scalable and low friction.

We only want to work with the best people, those who are prepared to work harder than the competition.
We are positive in our outlook and behavior.
We will compensate better.
We will have more fun.
We will sprint a marathon and win our races.
We will succeed together.

We exist to build long-term value for our investors.
Everyone who works here is an owner.